What Is the Yield Curve? (2024)

FAQs

What do yield curves tell us? ›

Narrator: The yield curve allows fixed-income investors to compare similar Treasury investments with different maturity dates as a means to balance risk and reward. Additionally, investors use its shape to help forecast interest rates.

The US Treasury Yield Curve is currently inverted, meaning short term interest rates are moving up, closer to (or higher than) long term rates. This unusual occurrence, called a yield curve inversion, has historically been a very reliable indicator of an upcoming economic recession.

The yield curve is involved in the transmission of changes in monetary policy to a broad range of interest rates in the economy. When households, firms or governments borrow from a bank or from the market (by issuing a bond), their cost of borrowing will depend on the level and slope of the yield curve.

What Is a Yield Curve? A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity.

This is a normal or positive yield curve. Interest rates and bond prices have an inverse relationship in which prices decrease when interest rates increase, and vice versa. Therefore, when interest rates change, the yield curve will shift, representing a risk, known as the yield curve risk, to a bond investor.

A steepening graph upward usually signals more economic growth and inflationary expectations, which results in increased lending rates. A 2-year note with a 1.5% yield and a 20-year note with a 3.5% yield is one example of a steepening yield curve.

We expect the 10-year U.S. Treasury yield to rise in 2022 and be between 1.5% and 2.0% at the end of the year. During 2022, the yield could overshoot this range. We are bearish on long-term bonds, but not because we believe the U.S. Federal Reserve (Fed) is on the verge of increasing interest rates.

Treasury yield curve in the U.S. January 2023. As of January 18, 2023, the yield for a ten-year U.S. government bond was 3.37 percent, while the yield for a two-year bond was 4.06 percent.

You'll want to know about yield and return. Yield is a general term that relates to the return on the capital you invest in a bond. Price and yield are inversely related: As the price of a bond goes up, its yield goes down, and vice versa.

Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall.

Why is the yield curve a good indicator? ›

When the yield curve starts to shift toward an inverted shape, it is perceived as a leading indicator of an economic downturn. Such interest rate changes have historically reflected the market sentiment and expectations of the economy.

Many investors use the spread between the yields on 10-year and two-year U.S. Treasury bonds as yield curve proxy and a relatively reliable leading indicator of a recession in recent decades.

Inflation's Effect on the Yield Curve

A normal, upwardly sloping yield curve is typically a sign of a strong economy. But a steep curve also may signal higher inflation. Stronger economic growth often leads to price increases.

The 10-year yield is used as a proxy for mortgage rates. It's also seen as a sign of investor sentiment about the economy. A rising yield indicates falling demand for Treasury bonds, which means investors prefer higher-risk, higher-reward investments. A falling yield suggests the opposite.

When a bond's price goes up, its yield goes down, even though the coupon rate doesn't change. The opposite is true as well: When a bond's price drops, its yield goes up.

What's the riskiest part of the yield curve? In a normal distribution, the end of the yield curve tends to be the most risky because a small movement in short term years will compound into a larger movement in the long term yields. Long term bonds are very sensitive to rate changes.

The slope of the yield curve tells us how the bond market expects short-term interest rates to move in the future based on bond traders' expectations about economic activity and inflation. This yield curve is inverted on the short end.

"Mortgage rates will decline slightly but end up higher overall across 2023. Expect interest rates to continue to rise and mortgage rates to reach their peak over the summer above 10%."

10-2 Year Treasury Yield Spread is at -0.81%, compared to -0.82% the previous market day and 0.58% last year. This is lower than the long term average of 0.91%.

Bonds compete against each other on the interest income they provide to make them seem attractive to investors. When interest rates go up, newer bonds have higher interest rates so existing fixed-rate bonds must sell at a discount to compete.

Do bond prices go up when yields go up? ›

Rising bond yields are a negative for bond holders because of the inverse relationship between bond yields and bond prices. When yields rise, prices of current bond issues fall. This is a function of supply and demand.

Rising yields can create capital losses in the short-term, but can set the stage for higher future returns. When interest rates are rising, you can purchase new bonds at higher yields. Over time the portfolio earns more income than it would have if interest rates had remained lower.

For instance, bonds tend to move higher as stocks move lower, and gold prices go up when the dollar falls—while other assets tend to move in tandem. Understanding intermarket relationships can help give investors additional insight and therefore make better, more informed trades.

Inflation. When inflationary pressures emerge, Treasury yields move higher as fixed-income products become less desirable. Additionally, inflationary pressures typically force central banks to raise interest rates to shrink the money supply.

The Fed has been massively hiking interest rates in a bid to bring down inflation, and this has meant a major increase in yields. As we've seen in the example above, when yields go up, bond prices go down. The faster yields go up, the faster bond prices crash.

Often a recession comes about a year after the year curve inverts. The 10 year and 3 month relationship first inverted in October. That's the most reliable relationship to watch according to the New York Federal Reserve. However, parts of the U.S. Treasury yield curve have been inverted since March 2022.

Almost two-thirds of chief economists believe a global recession is likely in 2023; of which 18% consider it extremely likely – more than twice as many as in the previous survey conducted in September 2022. A third of respondents consider a global recession to be unlikely this year.

However, recessions have been much shorter since World War II, with the typical economic downturn lasting approximately 10 months in the U.S. They can be much longer than that -- the Great Recession of 2007-2009 lasted 18 months -- or very short -- the COVID-19 recession of 2020 only lasted two months.

The low-yield bond is better for the investor who wants a virtually risk-free asset, or one who is hedging a mixed portfolio by keeping a portion of it in a low-risk asset. The high-yield bond is better for the investor who is willing to accept a degree of risk in return for a higher return.

How high will Treasury yields go? ›

Market analysts surveyed by Bankrate expect the 10-year Treasury yield to be 3.8 percent by the end of 2023, up from the 3.6 percent level they expected it to reach by the end of the third quarter of 2023, as indicated in the previous survey.

A common rule of thumb for identifying recessions is experiencing two consecutive quarters of negative gross domestic product (GDP) growth. The release of U.S. GDP data for the second quarter of 2022 showed the second consecutive negative GDP growth rate, leading many to believe that the country is now in a recession.

The spread between 10-year and 2-year U.S. Treasury bond yields reached a negative value of -0.67 percent in December 2022. The 10-year minus 2-year Treasury bond spread is generally considered to be an advance warning of severe weakness in the stock market.

Basic Info. US Recession Probability is at 57.13%, compared to 47.31% last month and 6.04% last year. This is higher than the long term average of 13.88%.

With inflation on the rise, investors may wish to opt for non-traditional inflation hedges like high yield bonds and leveraged loans which generally offer lower to little duration risk, respectively, and a low correlation to investment grade bonds.

Here is a list of our partners and here's how we make money. Though the economy occasionally sputtered in 2022, it has certainly been resilient — and now in the early months of 2023, the U.S. is still not currently in a recession, according to a traditional definition.

The yield curve is the difference between long-term interest rates and short-term interest rates, often quantified in the United States as the difference between 10-year Treasury interest rates and 2-year Treasury interest rates.

Historically, the United States Government Bond 10Y reached an all time high of 15.82 in September of 1981.

Declines in the 10-year Treasury yield generally indicate caution about global economic conditions while gains signal global economic confidence. At the end of 2022, the 10-year Treasury note was yielding around 3.88%—but back in April 2000, the 10-year yield was 6.23%.

Prediction of 10 year U.S. Treasury note rates 2019-2023

In December 2022, the yield on a 10 year U.S. Treasury note was 3.62 percent, forecasted to increase to reach 4.12 percent by August 2023. Treasury securities are debt instruments used by the government to finance the national debt. Who owns treasury notes?

Has the yield curve inverted 2022? ›

When coupon payments on shorter term Treasury bonds exceed the interest paid on longer term bonds, the result is an inverted yield curve. This occurred in 2022 and carried into 2023. Some market observers consider a yield curve inversion a harbinger of economic recession.

The first clear inversion in 15 years happened in July 2022, although there were brief and shallow inversions in August 2019 and April 2022. All that is old news.

For a few months in 2019, the yield curve inverted and warned of a potential recession. Towards the end of 2021, it happened again. And throughout 2022, the inverted yield curve has looked more and more extreme.

As a result, the shape of the Treasury yield curve has been generally flattening. A closely watched part of the curve, measuring the spread between yields on two- and 10-year Treasury notes , shows the gap at roughly 60 basis points, nearly 20 points lower than where it ended 2021.

Is there going to be a recession in 2022? The most likely scenario is still a modest recession that lasts six to nine months or so. Eighty-eight percent of economists predict a downturn will be mild, according to a survey earlier this month by Wolters Kluwer Blue Chip Economic Indicators.

Note that the yield-curve slope becomes negative before each economic recession since the 1970s. That is, an “inversion” of the yield curve, in which short-maturity interest rates exceed long-maturity rates, is typically associated with a recession in the near future.

The United States 10 Years / United States 2 Years Government Bond spread value is -78.3 bp (last update 11 Feb 2023 0:15 GMT+0).

An inverted yield curve shows that long-term interest rates are less than short-term interest rates. With an inverted yield curve, the yield decreases the farther away the maturity date is.

Market analysts surveyed by Bankrate expect the 10-year Treasury yield to be 3.8 percent by the end of 2023, up from the 3.6 percent level they expected it to reach by the end of the third quarter of 2023, as indicated in the previous survey.

Recessions can last from a few weeks to several years, depending on the cause and government response. Data from the National Bureau of Economic Research shows that between 1854 and 2022, the average recession lasted 17 months.

How long will yield curve stay inverted? ›

Over the last several decades, yield curve inversions have been brief, lasting under 10 months.

If the central bank raises rates as much as recent projections indicate, the risk of recession rises. Consequently, bond yields have been pulling back from recent highs and the yield curve has flattened.

Treasury floating rate notes are U.S. government bonds with coupons that periodically reset using 3-month (13 week) Treasury bill (T-bill) rates. The U.S. government began issuing these bonds in January 2014.

The normal yield curve is a yield curve in which short-term debt instruments have a lower yield than long-term debt instruments of the same credit quality. An upward sloping yield curve suggests an increase in interest rates in the future. A downward sloping yield curve predicts a decrease in future interest rates.